You are considering an investment in a municipal bond that has a yield of 4%. Your tax rate is 25%. What is your taxable equivalent yield?

Question

Quizplus · Accepted Answer

To calculate the taxable equivalent yield, we need to find out the yield of a taxable bond that would provide the same after-tax return as the tax-exempt municipal bond.
Taxable equivalent yield = tax-exempt yield / (1 - tax rate)
Taxable equivalent yield = 0.04 / (1 - 0.25) = 0.0533 or 5.33%
Therefore, the answer is E, 5.33%.

You Are Considering an Investment in a Municipal Bond That